The Bundesbank advocates more tiered EU remuneration rules depending on a bank’s size and complexity as part of the impending implementation of the Basel III finalisation. Thought should be given as to whether small, non-complex institutions “need even more proportional regulation” under the EU’s current remuneration regime, the authors write in the October edition of the Monthly Report. The previous amendment of the Capital Requirements Directive (CRD) to introduce greater proportionality of remuneration rules should be regarded as the “first step”. “The forthcoming transposition of the Basel III reform package into European law provides an opportunity to further exempt small, non-complex institutions from the administrative burden of remuneration rules, where they are not required by supervisors,” the Monthly Report states. “In this regard,” the Bundesbank writes, “following the principle of proportional regulation, it is important that smaller credit institutions with less complex business models are exempted from the remuneration regulations to reduce their administrative burdens as far as this is acceptable from a supervisory perspective.”

Increase understanding of rules

The authors argue that if any changes to the framework are necessary, European legislators must ensure “that the costs of the ensuing transition processes are as low as possible for credit institutions” and that “changes (…) must only be made if they serve a supervisory purpose”. “This should help to boost understanding of the meaning and purpose of the rules among the affected credit institutions and their staff members. Greater acceptance of the agreed rules may help minimise attempts to circumvent them.”

Positive developments in design of remuneration systems

Bundesbank experts are generally satisfied with the change in remuneration systems since the financial crisis of 2007-08. “Experience from supervisory practice shows that banks and savings banks have made significant progress in ensuring that their remuneration systems are appropriately designed and, in particular, have integrated their remuneration systems more closely with the other areas of their risk management,” they write. “To ensure success over the long term, the rules contained in their remuneration policies must be applied consistently by the decision-makers at each credit institution.”